Rob Arnott, the founder of Research Affiliates and a legendary investor, is impressed by the capabilities of AI chatbots. However, he remains cautious about the future of AI stocks.
Arnott Impressed By AI, But Wary of Market Bubble
Arnott recently had an AI chatbot summarize one of his papers and was amazed by the “brilliant” results, reported Business Insider on Tuesday. Despite this, he remains skeptical about the future of AI stocks.
Despite his amazement, Arnott is not overly optimistic about AI as an investment. He believes that the future potential of AI stocks is already factored into their current valuations, which could limit future returns.
Arnott is particularly concerned about increasing competition in the AI industry. He pointed out that companies like Nvidia NVDA, which create the chips essential for AI, may not allow Nvidia to maintain a 50% profit margin without a fight from other chip makers.
He highlighted the lack of a clear path for AI technology consumers to generate revenue. Arnott stated, “You have to have happy customers, and AI’s customers have yet to figure out how to monetize AI.”
Arnott’s worries also encompass the broader stock market. He highlighted that U.S. market capitalization relative to GDP is at a record high, while the Shiller cyclically-adjusted price-to-earnings ratio ranks as the third-highest in history, signaling a possible bubble.
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Small-Cap And Emerging Market Value Stocks Favorable
Despite these concerns, Arnott sees potential in other segments of the stock market, particularly in small-cap value stocks and emerging market value stocks. He emphasized that these segments are not just cheap, but also high conviction.
Investors can access these segments through exchange-traded funds such as the Vanguard Small-Cap Value ETF VBR and the DFA Dimensional Emerging Markets Value ETF DFEV.
Experts Warn Of AI Boom Risks And High Stock Valuations
Arnott’s concerns about the AI sector’s valuation and the stock market as a whole are echoed by other industry experts. Federal Reserve Chair Jerome Powell recently acknowledged that equity prices are “fairly highly valued,” with key valuation metrics reaching levels not seen since the dot-com crash.
Meanwhile, CNBC’s Jim Cramer has highlighted the conflicting forces driving the AI sector, pointing to both caution and urgency in corporate spending. This comes amid a report from GQG Partners, which argues that the AI investments are exhibiting the dotcom era “on steroids.”
Arnott’s caution about the AI sector’s future and the stock market’s current state reflects a growing sentiment in the industry, with experts warning of potential bubbles and overvaluations.
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